As growth slows, banks across the globe need to urgently consider a range of radical organic or inorganic moves before the economy hits a downturn, according to consultancy McKinsey & Co.
The majority of banks globally may not be economically viable because their returns on investments are not keeping pace with costs, McKinsey said in its annual review of the industry released Monday.
The firm said banks should explore greater development of technology, greater outsourcing and consolidation in order to bolster themselves against the effects of a downturn.
“On balance, the global industry approaches the end of the cycle in less than ideal health, with nearly 60 percent of banks printing returns below the cost of equity. A prolonged economic slowdown with low or even negative interest rates could wreak further havoc,” McKinsey said in its report.
The consultancy identified geography, scale, differentiation, and business model as the factors separating “the 40 percent of banks that create value and the 60 percent that destroy it”.
Since the last financial crisis, there has been an influx of new competitors and innovations such as Monzo, Revolut and Starling Bank, along with the entrance of global tech giants such as Apple.
McKinsey criticised banks’ responses to the challengers was “business-as-usual” and risks their position in the market as the new entrants change customer behaviour.
Banks allocate just 35 percent of their information-technology budgets to innovation, while fintechs spend more than 70 percent, McKinsey said.
“While the jury is still out on whether the current market uncertainty will result in an imminent recession or a prolonged period of slow growth, the fact is that growth has slowed. As growth is unlikely to quicken in the medium term, we have, without question, entered the late cycle,” it said in its report.
“Compounding this situation is the continued threat posed by fintechs and big technology companies, as they take stakes in banking businesses. The call to action is urgent: whether a bank is a leader and seeks to “protect” returns or is one of the underperformers looking to turn the business around and push returns above the cost of equity, the time for bold and critical moves is now.”